Nortel's Poisoned Chalice?

When you're on your way out, in more ways than one, and you want to wreak revenge on those you truly despise you leave them a poisoned chalice, one fortified with nutrients but laced with a cocktail of deadly agents, one that they have little choice to drink.

For a disgruntled employee that can be the computer virus from Hades. For a head of household that can include a business or property that the heirs can ill-afford to manage. For a political kingpin that can be scandals that will be unearthed, forever embroiling and tainting the new chiefs and their rivals when the old boss is put to earth.

This may well be the case, intentional or more likely unintentional but with the same effect with the sale of Nortel's enterprise division to Avaya

The seemingly rosy $2.4 billion Nortel's enterprise division earned in 2008 has quickly been eroded to only $860 million in business in the first six months of 2009, down 34 per cent from a year earlier. It lost $209 million compared to an operating profit of $168 million a year earlier.

The arsenics and strychnines are not just the severe downturn but a lack of faith by many resellers and customers in the enterprise division's offerings caused by Nortel's lousy finances and poor top management. As soon as this comm/tech giant announced that it was in financial trouble last year it was doomed like the whiff of almonds that are the telltales of cyanide--from a firm that had reportedly been detoxified from past mismanagement and scandal. 'Here we go again?' came the fear. Understandably channel, prospects, and existing customers seeking replacements or upgrades started going elsewhere. Who can trust Nortel again? Who wants to risk being stuck with end of life goods?

Here's the nub. If resellers and customers picked Nortel over Avaya why should they buy/stay with Nortel now that it will become Avaya? Will Avaya really continue to support Nortel's product lines? The one scenario there is Avaya may act like a spider; after paralyzing and cocooning its prey it sucks out the juices created by special enzymes that liquify the organs--until there is nothing left.

Nortel has been the walking dead, its heroic and dedicated engineers like the still-vital organs struggling with weakening condition to produce and support IP-oriented quality products as they were drained with layoffs. Little wonder that in the contact center field at least, reported Interactive Intelligence's Joe Staples--whose firm has seen competitors like the 'old' Aspect, Davox, Rockwell et al disappear and many others fade into insignificance--Nortel's product line was aging with little new to get these buyers excited.

Then again IP-from-the-ground-up companies like Aastra, Cisco, Fonality, Interactive Intelligence, and ShoreTel, to name but a few, didn't have the legacy TDM/PSTN baggage to lug with them. For these companies there is no need to 'migrate' customers to IP; they are already there.

The substance that stops the heart may be the technology shift from PSTN/TDM to IP. What is happening is another lesson that firms that were based in the new technologies are typically but not always more successful than those that been formed from and made their mark in the old ones. When the core technologies change the old outfits are left behind.

A great example to illustrate this is railroads. Which is why if you've seen or ridden on a commuter or Amtrak or in Canada VIA Rail train they are pulled or pushed by diesel or electric locomotives built by outfits that had started out making them, not by firms that had made their mark constructing steam engines.

Those companies: Alco, Baldwin, Lima and their Canadian licensees CLC and MLW, failed to make the transition when the railroads switched from steam to diesel in the 1940s and 1950s. They had tried build diesels, in an attempt to capitalize on the loyalty of the customers that had relied on them for their 'legacy' steam engines, but their diesel products failed to match the quality and features of the steam builders' 'non-legacy' competition. The steam firms had allied with electrical gear makers GE (Alco-GE) and Westinghouse with Baldwin--most railroad locomotives are diesel-electric with motors driving the axles--but they fell apart. In GE's case it emerged as a competitor to Alco and supplanted it.

In a lesson for technology as well sometimes new entrants don't fare as well if their solutions are not suited for particular markets though these tools may be proven elsewhere. Fairbanks Morse, which made marine diesel engines, entered the steam-to-diesel fray in the late '40s but exited 10 years later. While its technology, opposed-piston engines, offered an appealing much higher horsepower in the same space than its competitors, could not hack the very different environment of railroads. It is one thing to have the engine blocks being battered and rattled by depth charges and hurricanes. It is another for them to be violently jerked front and back and side to side in a moving train.

Nortel has also left for its enemies a set of legal and political nightmares, like its powerful customer Verizon who wants its pound of flesh. Then there are the workers who may in likelihood will need to find new jobs sooner than later despite the $15 million employee-retention plan and promises to retain 60 percent of Nortel's North American staff by Avaya.

Job-keeping programs are merely ways to enable staff to find other careers or pare down their expenses so they can live on much less when they are ultimately let go. Canada is teetering on an election which may take place this fall but the latest will be next spring. The Official Opposition Liberals have made it known that its attack will include on how the Conservative government has handled the Nortel debacle, including the treatment of its pensioners and long-term disabled former employees.

Besides who is kidding whom here? Does anyone truly believe that Avaya will actually retain Nortel's North American staff, in particular those in now 'foreign' Canada, whose offices are but a 90 minute flight or 9 hour scenic in the spring/summer/fall but dangerous-in-the-winter drive from its New Jersey HQ? American firms have more often than not when they buy Canadian outfits shift their operations to home base to save money and gain greater control. Why should Avaya, which isn't exactly flush with cash, behave any differently? Especially with the high Canadian dollar?

The question is can Avaya or more accurately its owner Silver Lake Partners can afford to sustain the Nortel 'legacy' in what appears to be a slow recovery amidst a marketplace that is fast-moving to pure IP, where voice is another set of data to be managed? And where the savvy outfits are having the routing hosted rather than using scarce capital resources to buy hardware and licenses for boxes and servers stuck in some closet, money that will be spent more effectively not on infrastructure but on R&D, production, and marketing? Is it willing to be a political punching bag in Canada and the target of legal attacks and having its government customer base eroded in the U.S?

Then again did Avaya have any choice but to drink from the cup? If it had declined to sip it may have met a crueler and more likely fate at the hands of Cisco et al. Avaya may well have a strong constitution and corporate antidotes to cope with the poisons laced with the strength from the beverage but could it continue to take the battering from such powerful, flexible, and younger opponents?

Nortel's toxic chalice has with Avaya drinking from it also wounded its other rivals, e.g. Iwatsu, Mitel, Siemens Enterprise, and Toshiba. The deal has made Avaya number one at Siemens' expense that gives it a powerful position, but is Avaya strong enough to capitalize on this new position?

The only cure for this poison is for Avaya backer Silver Lake Partners to suck it up and lay out the cash now to devise and launch a strategy to weaken and destroy, and buy at dimes to dollars the other legacy TDM-based vendors to create one outfit that has one foot in the TDM past that will swing then those customers into IP with an integrated mix of flexible open and hosted as well as premises solutions. If Silver Lake does not do this or hesitates it may be too late for Avaya, Silver Lake, its investors, and Avaya (and Nortel) employees.